Following the journey from the highlands, Stewart and Elín visit Sigurlín who purportedly lived in Laugarvatn. In reality the scenes were filmed in Hafnarfjörður , the street now confirmed as Holtsgata.
Hafnarfjörður, its name simply means ‘harbour fjord’, which refers to the excellent natural harbour, has Iceland’s longest history of continuous port trade since the 1300’s. Hafnarfjörður is famous for having one of Iceland’s largest settlements of elves, dwarves and other mystical beings, which (translating from the Icelandic Huldufólk) are collectively called ‘Hidden Folk’. Centuries old folklore has it that whole clans of such beings reside in the rocks that make up part of the town’s centre. We do not doubt this at all. 
Images © BBC Scotland, © 2015 Google.
1. Steindórsdóttir, R. (2014) pers. comm 18th May, 2014
2. Steindórsson, S. Hálfdanarson, Ö. Hálfdanardóttir, E. (2007) Hafnarfjörður – Vegahandbókin 2007. p211